Is SABMiller The Ultimate Retirement Share?

Published in Company Comment on 13 August 2012

Will shares in SABMiller help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving any time soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at SABMiller (LSE: SAB), the South African brewing giant with a global footprint and ownership of brands including Peroni Nastro Azzuro, Grolsch and Miller Genuine Draft.

I'll have a lager

SABMiller's main product is lager, the market for which is expanding rapidly, thanks to the world's emerging economies. Over the last 10 years, SABMiller has beaten the FTSE 100 hands down:

Total Return20072008200920102011Trailing 10 yr avg.
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.9%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

SABMiller's spectacular outperformance has been the result of acquisitions and organic growth in many of its markets, especially South America and Africa, where it has very high market shares. As a sin stock, it is quite defensive and performs strongly even in downturns; unlike pub companies, SABMiller makes money whether people buy their beer at supermarkets or in pubs and bars.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how SABMiller shapes up:

Year founded1895
Market cap£45bn
Net debt£11.6bn
Dividend Yield2.1%

Five-year average financials

Operating margin17.6%
Interest cover6.0x
EPS growth27%
Dividend growth17.0%
Dividend cover2.6x

Source: Morningstar, Digital Look, SABMiller

Here's how I've scored SABMiller on each of these criteria:

LongevitySAB's original beer, Castle Lager, remains a market leader 117 years later.5/5
Performance vs. FTSEOutstanding, but the shares are expensive.4/5
Financial strengthHigh, stable and expanding profit margins balance its gearing.4/5
EPS growthImpressive earnings growth has fuelled its highly rated share price.4/5
Dividend growthGood growth, slightly conservative payout ratio.4/5

Total: 21/25

SABMiller's score of 21/25 suggests that it could be an excellent candidate for a retirement fund portfolio -- and I agree. My main concerns are that SAB's prolonged high performance has made its shares expensive and low-yielding, with a current price-to-earnings (P/E) ratio of 20 and a yield of just 2.1%. In the long term, I don't think this matters, as earnings and thus yield should continue to grow, even if the share price is re-rated to a lower P/E. However, in the shorter term, SABMiller does not offer great value as a source of income.

Expert selections

One way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download "8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland does not own shares in SABMiller.

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Dylantherabbit 13 Aug 2012 , 12:01pm

I would love to buy into SAB, but not at this price. I have held Diageo for many years but at the moment like SAB it is far to expensive. Booze is as popular as its ever been. SAB is on a p/e of 20 and DGE about 18. I would want DGE to be nearer to £13 and SAB nearer £20 before considering a purchase.

Excel35 13 Aug 2012 , 1:19pm

I like the quality companies you are choosing for your retirement portfolio, however I think it's wrong to say the price you pay doesn't matter, with a view to the long term or not.

"its shares expensive and low-yielding, with a current price-to-earnings (P/E) ratio of 20 and a yield of just 2.1%. In the long term, I don't think this matters, as earnings and thus yield should continue to grow, even if the share price is re-rated to a lower P/E."

Quite at odds with the likes of Woodford and Buffet, they do care about the price.

Price matters. Price matters a lot!

jackdaww 13 Aug 2012 , 1:36pm

price matters - agreed.

i bought as much as i could in 2009.

to buy now would cost double plus the divis a lot less.

no brainer?

goodlifer 13 Aug 2012 , 11:39pm

"I don't think this (the buying price) matters.

What if your share goes sour?
It's fatally easy to forget that this can actually happen.

The higher the price you pay, the lower the margin of safety

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